© 2014 The Texas Lawbook.
By Janet Elliott (AUSTIN) – BP and Transocean take their bitter, protracted half-billion-dollar battle over who pays for pollution-related liabilities arising from the 2010 Deepwater Horizon disaster to the Texas Supreme Court this week.
The two energy giants have been engaged in legal warfare for four years over which company is to blame, but they’ve also fought over whose insurance coverage should pay.
The federal court in New Orleans overseeing the Deepwater Horizon case asked the Texas high court to decide a simple but critical issue: Is BP covered by Transocean’s insurance policy?
BP says it is entitled to the coverage as a named “additional insured” in Transocean’s policy. Transocean argues that the policy must be read in conjunction with the two parties’ drilling contract, which limits Transocean’s liability to pollution risks on or above the Gulf of Mexico surface, not below the water.
“This has been a wild case,” says Houston trial lawyer Steven Roberts, who has represented rig operator Transocean Ltd. since the April 2010 blowout.
Earlier this month, U.S. District Judge Carl Barbier ruled the spill was the result of gross negligence by subsea well owner BP. Barbier found BP 67 percent responsible, rig owner Transocean 30 percent responsible and cement contractor Halliburton 3 percent responsible. BP has said it will appeal.
Transocean initially won the insurance coverage fight when Barbier declared that BP was not covered under Transocean’s insurance policies for below-surface pollution.
The U.S. Court of Appeals for the Fifth Circuit tentatively reversed Barbier’s decision in March 2013, but withdrew its opinion and asked the Texas Supreme Court to answer two key questions under Texas law.
The case has attracted considerable interest from the Texas energy and business communities, as well as multinational insurance companies and advocates for insurance consumers.
Roberts, a Houston partner in Sutherland, Asbill & Brennan, says the outcome of the case carries ramifications for the energy and insurance industries.
“It has raised considerable concern within the oil and gas industry about whether parties are going to be bound by their contracts,” Roberts says. “The oil and gas industry lives and dies on contractual relationships, in particular the indemnity agreements that decide which party will be responsible for what.”
Questions for Court
Both questions turn on a 2008 Texas Supreme Court case involving the death of a contract employee at a Port Arthur refinery. In that case, Evanston Insurance Co. v. ATOFINA Petrochemicals Inc., the court ruled that ATOFINA was insured under the contractor’s umbrella insurance policy and that the insurance must cover $5.75 million of ATOFINA’s settlement with the worker’s family.
The 5th Circuit asked the Texas justices to consider that ruling in determining whether BP is covered by Transocean’s policies.
The second question asks whether the longstanding doctrine that requires ambiguous language be interpreted in the insured company’s favor – known as contra proferentem – applies under ATOFINA, given the facts of the Deepwater Horizon case.
Reagan Simpson, a Houston partner in Yetter Coleman, will argue for Transocean and BP’s case will be presented by David Goodwin, a San Francisco partner in Covington & Burling and Allan Moore, a Washington D.C. partner for the firm.
BP wants the Supreme Court to look at the “four corners” of the insurance policy. BP also argues that it is consistent with ATOFINA for the court to construe uncertainties in favor of coverage.
“At stake in this appeal is whether this Court will see fit to reaffirm settled principles of Texas insurance law, which are vitally important to Texas businesses generally and the oil and gas industry specifically, or will instead accept the Insurers’ invitation to inject considerable uncertainty into Texas insurance law by transforming questions of insurance policy interpretation…into unpredictable and fact-intensive inquiries that are not limited by the language of the insurance contract,” BP said in a brief.
BP is supported by The National Association of Manufacturers, which counts BP among its members. In a brief filed by Pamela Stanton Baron of Austin, the association said the court should maintain 125 years of law that looks at the terms of the policy and interprets ambiguous language in favor of the insured.
Transocean wants the court to draw a distinction with ATOFINA, saying the 2008 case involved an insurance policy that essentially did not incorporate an underlying contract. Roberts says BP wants to “be able to take advantage of insurance that it didn’t pay for and certainly the insuring companies did not receive a premium for” to take that risk.
Roberts points to his deposition of then-BP CEO Tony Hayward, saying that Hayward testified BP did not expect its drilling contractors to insure BP for subsurface pollution.
Transocean also wants the court to create an exception for “sophisticated” policyholders like BP when determining the outcome of disputes over confusing policy provisions.
The International Association of Drilling Contractors and several insurance industry groups filed briefs in support of Transocean.
United Policyholders, a California nonprofit that represents insurance consumers, also weighed in, urging the Supreme Court not to tilt the playing field in insurance companies’ favor by recognizing an exception for certain sophisticated policyholders.
“That’s been a black letter issue forever and to have an exception made on the basis of some notion of sophistication would put Texas in the minority of jurisdictions and really be a sea change for insureds here in this state,” said Skidmore, a Dallas Haynes and Boone partner.
Contract Terms Being Rewritten
Even before a decision in Texas, the case is impacting how drilling contracts and insurance policies are being written.
Roberts says insurers are requiring Texas companies to agree to have their policies governed by laws of other states, usually New York, which are clear that courts should look at the parties’ entire relationship “rather than engage in some sort of Talismanic reading on one portion of an insurance policy.”
According to Skidmore, newly written policies now contain endorsements that specify liability is limited to indemnity limits in underlying contracts.
“They are trying to remove the uncertainty by dealing with it contractually and making it expressly linked,” he says.
Edward Grauman, an environmental litigator in the Austin office of Beveridge & Diamond, says one lesson of the case is that language does matter.
“Regardless of how the Texas Supreme Court rules, you’re likely to see policyholders be more attentive to the provisions in their insurance policies regarding the scope of coverage for additional insureds.”
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